State’s raids on rainy-day fund raise red flag, Moody’s warns

State Treasurer Fitch calls report to investors ‘a shot across the bow’ for legislative leaders

By TED CARTER

Gov. Phil Bryant’s three draws from Mississippi’s reserve fund have left the fund at its lowest level in 13 years and led Moody’s Investor Services to warn investors the state’s fiscal position is weakening.

Moody’s July 11 report characterized the drawdowns as a “credit negative” and came just two days after legislators gave Bryant unlimited authority to continue tapping the Budget Stabilization Fund. So far, the governor has siphoned about $110 million in rainy-day money to keep a balanced budget amid a fiscal 2016 revenue shortfall of around $210 million. Bryant has also ordered two rounds of spending cuts of about $65 million.

Remarking on the shrinking amount of budget stabilization money, Moody’s analyst Julius Vizner said he estimates the state’s rainy-day fund balance will drop to 1.4 percent of total revenues from 6.7 percent just two years ago. The projection assumes the unassigned general fund balance remains the same as it was at the end of fiscal 2015, Vizner said.

The 1.4 percent of total revenue marks the lowest percentage of reserve money for the state since 2003, according to Moody’s spokesman David Jacobson.

The spokesman emphasized that the shrunken reserve fund is not sufficient to prompt a downgrade of the state’s current Aa2 rating with a stable outlook on Mississippi’s $5.2 billion of debt. The Aa2 is a classification that is the third highest of Moody’s debt designations, according to Jacobson.

“The median debt rating for states is Aa1, “which is quite higher than Mississippi’s,” Jacobson said.

Vizner’s report to investors noted that Mississippi overestimated fiscal 2016 tax collections, with revenues more than $200 million, or 4 percent, below budgeted estimates. The fiscal 2016 budget suspended the state’s 2 percent set-aside policy whereby the state budgets to spend only 98 percent of what it expects to collect, which in previous years had buffered the state against revenue underperformance.

Vizner advised investors that Mississippi state government has a successful record of making spending cuts to offset revenue shortfalls. However, he also noted that “on top of revenue underperformance, Mississippi just passed a record $415 million tax cut to be phased in over 12 years.”

Those tax cuts for businesses and individual taxpayers will come on top of $350 million in tax breaks to businesses Bryant pushed through during his first four years in office.

With extensive cutting of expenditures in the past fiscal year and new cuts coming in the current fiscal year, it is unclear how much more cutting Mississippi can do.

When legislators go to work on the fiscal 2018 budget early next year, they must come up with an additional $32 million to $40 million to offset a shortfall in money available for debt service. The $111.5 million in special funds legislators thought they could use to pay debts in fiscal 2017 is actually $73 million to $80 million, Treasurer Lynn Fitch told Bryant and legislators in late April.

Reacting to Moody’s July 11 investor warning, Fitch said Tuesday the report “is essentially a warning shot over Mississippi’s bow.”

Added Fitch, “I hope that the Legislature takes notice. Mississippi taxpayers cannot afford a hit to our credit rating. Now it is more important than ever for our Legislature to institute truly conservative fiscal policies, like spending within our means, keeping borrowing to a minimum, and shoring up our rainy day fund.”

Fitch has been especially critical of the state’s willingness to take on new debt, and questioned why legislators were willing to pass a $560 million general obligation bond bill with revenues falling far below estimates.

The new borrowing, she said in a late spring interview, will increase a per-capita tax-supported debt load in which a debt affordability study she recently issued put at $1,747. By contrast, the U.S. median tax-supported debt per-capita is $1,012, the debt study reported.

Moody’s Jacobson said his rating’s firm put the state’s per-capita debt at $1,707, a figure that gives Mississippi a per-capita debt ranking of 15th among the 50 states.

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